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from Global Investing:

Hair of the dog? Citi says more LTROs in store

Just as global markets nurse a hangover from their Q1 binge on cheap ECB lending -- a circa 1 trillion euro flood of 1%, 3-year loans to euro zone banks in December and February (anodynely dubbed a Long-Term Refinancing Operation) -- there's every chance they may get, or at least need, a proverbial hair of the dog.

At least that's what Citi chief economist Willem Buiter and team think despite regular insistence from ECB top brass that the recent two-legged LTRO was likely a one off.

Even though Citi late Wednesday nudged up its world growth forecast for a third month running, in keeping with Tuesday's IMF's upgrade , it remains significantly more bearish on headline numbers and sees PPP-weighted global growth this  year and next at 3.1% and 3.5% compared with the Fund's call of 3.5% and 4.1%.

But its euro zone calls are gloomiest of all. First off, it sees two consecutive years of economic contraction of the bloc as a whole -- a 1.0% shrinkage this year followed by 0.2% drop in 2013. Against this dire backdrop, it expects  Spain to be forced to seek Troika (EU, IMF and ECB) support later this year that will be focussed on recapitalizing and restructuring its ailing banks and it also expects both Portugal and Ireland to need second bailouts from the same source.

And with that sort of pressure from deleveraging, austerity, sovereign debt stress and recession , the ECB will have to bring out yet another punchbowl, it reckons.

We expect that renewed EMU strains will prompt the ECB to launch at least one more multi-year LTRO and continue to pencil in one or two more rate cuts by end-2013.

Yet, just like the euphoric effects of both the binge and "morning after" drink, the problem with LTRO is that it risks causing more problems than it solves by tying the banks of weak peripheral euro states ever closer to their ailing sovereigns.

from The Great Debate:

The myth of America’s decline

This is an excerpt from "The Reckoning: Debt, Democracy and the Future of American Power," published this week by Palgrave Macmillan.

For all the doom and gloom about “American decline,” the United States looks nothing like the twilight empires to which it’s often compared. For one thing, in this age of globalization, a far greater swath of the planet – including some surprising nations like China and Saudi Arabia – wish America well, albeit for their own, selfish reasons. Why would either country, in spite of what it may think of American culture or foreign policy, want to upset a status quo upheld, at great expense, by American power that enriches them more each and every year? From the US perspective, this should be an advantage. It creates stakeholders all over the planet that genuinely hope Washington can solve its current fiscal problems. With the exception of the British Empire, which had a relatively benign replacement lined up when it ran out of steam, history offers no other example of a waning empire whose most obvious potential rivals – China, India, the EU, to name but a few – all have good reasons to want to help arrange a long, slow approach to a soft landing.

“I have no objection to the principle of an American Empire,” writes Niall Ferguson, the Oxford historian. “Indeed, a part of my argument is that many parts of the world would benefit from a period of American rule.” Ferguson and others like him recognize the importance of the role the United States has played, a role that “not only underwrites the free exchange of commodities, labor and capital but also creates and upholds the conditions without which markets cannot function – peace and order, the rule of law, non-corrupt administration, stable fiscal and monetary policies – as well as public goods.” Ironically, many would-be topplers of American hegemony no doubt feel the same way.

Another key difference from the decline of Europe’s imperial powers is that while America’s relative decline is underway, the United States hardly looks likely to sink quickly to second-class status. In other words, the current trajectory would see the United States settle into a kind of parity with emerging powers. In instances where the changing of the guard occurred with amazing speed – Spain after Philip II, the Dutch after the Napoleonic wars, France after World War I, and Britain after World War II – the declining powers were exhausted, attempting to cling to far-flung colonies because their imperial economic models depended on extracting every last ounce of labor and resources to prop up the home country. The United States has something none of them ever enjoyed – the world’s largest domestic consumer market, as well as a commanding lead in many of the disruptive technologies that still drive product innovation. So absolute decline appears only a distant prospect – unless Americans badly fail at the polls, inviting another decade just like the one just finished.

Relative decline for the United States is hardly the worst possible outcome, if Washington and its allies can fashion a post-hegemonic system as resilient as the US-dominated one launched by Roosevelt and Truman in the mid-1940s. And Americans may find that, after decades of superpower headaches, they kind of enjoy being mortal again.

But this will require some serious repair work, and not just to the national balance sheet. Americans are right to take pride in their country’s achievements, but at times this pride looks, from the outside, a lot like arrogance or even racism. “Brazil, China, India, and other fast-emerging states have a different set of cultural, political, and economic experiences, and they see the world through their anti-imperial and anticolonial pasts,” says G. John Ikenberry, a Princeton professor of international relations and former State Department official. “Still grappling with basic problems of development, they do not share the concerns of the advanced capitalist societies. The recent global economic slowdown has also bolstered this narrative of liberal international decline. Beginning in the United States, the crisis has tarnished the American model of liberal capitalism and raised new doubts about the ability of the United States to act as the global economic leader.”

Removing the stain of financial fundamentalism should be a priority of US foreign policy, too, and I believe it to be achievable. In spite of the financial charlatanism that prevailed in the first decade of the century, the American economy is sputtering but not crumbling. American innovations still drive progress in many fields of science and technology, even if some of its most innovative software – Facebook, Twitter, the Internet generally – occasionally undermine its own interests abroad. American manufacturing, recently written off as a legacy of a bygone age, is mounting a comeback as the costs of labor in the emerging world rise, along with the costs of transporting products back to the home market. At some point, the political risks of a factory in China or Bangladesh might just outweigh the incremental labor cost savings. For these and other reasons, then, the United States is hardly a “spent” power. A more apt word might be winded, like an aging runner who ate, smoked, and drank too much over the Christmas holiday. The United States struggles today to call up the old reserves of strength that seemed to power growth and job creation effortlessly through the preceding two decades. This is partly because the “steroid” of the housing bubble that fueled its irrational exuberance during many of those years has turned into a weight around its neck in the form of slow, excruciating deleveraging of household debts. But the runner lives and still has a few marathons left in him.

from Breakingviews:

Wobbly markets face second-quarter correction

By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Markets are wobbling on renewed fears about global growth. Rising yields on Italian and Spanish bonds add to the alarm. And it would be wrong to assume that central bankers will ride to markets’ rescue this time - because oil prices and inflation are part of the global gloom.

Risk assets face a second-quarter correction as central banks - rightly - hold back on further stimulus. Many investors assume that central banks will help because falling stock prices are bad for consumer confidence and growth. But rising oil prices and inflation are also bad for growth. And central bankers may be realising that excess monetary stimulus is behind soaring global oil prices.

“Current conditions do not warrant further accommodation,” said Charles Plosser, the admittedly hawkish president of the Philadelphia Fed, at the end of last month. His fears are shared by other Fed governors. Yet the real risks go much deeper. With ultra-loose money policies the central banks are not just facilitating the spread of inflation, they are creating it at source - via commodity prices. Andrew Sentance, recently of the Bank of England’s monetary policy committee, warned in March that central banks need to rethink, and that further money loosening could recreate the inflation of the 1970s.

Rising Spanish and Italian bond yields and weak euro-zone growth are a further worry for markets. But the European Central Bank, having controversially supplied a fresh trillion euros to banks in what may prove to be a short-term palliative, is ill-placed to intervene again.

Global investors must therefore weigh an ugly mix of risks: the possibility of renewed, intense, euro-zone crisis; middling global growth; and oil prices compatible with recession. And yet U.S. equities have just enjoyed their best first quarter in 14 years after a strong run-up in global equities since 2009. Something has to give.

from Expert Zone:

Scary oil

(The views expressed in this column are the author's own and do not represent those of Reuters)

Today's fragile global economy faces many risks: the risk of another flare-up of the euro zone crisis; the risk of a worse-than-expected slowdown in China; and the risk that economic recovery in the United States will fizzle (yet again). But no risk is more serious than that posed by a further spike in oil prices.

The price of a barrel of Brent crude, which was well below $100 in 2011, recently peaked at $125. Gasoline prices in the U.S. are approaching $4 a gallon, a damaging threshold for consumer confidence, and will increase further during the high-demand summer season.

The reason is fear. Not only are oil supplies plentiful, but demand in the U.S. and Europe has been lower, owing to decreasing car use in the last few years and weak or negative GDP growth in the U.S. and the euro zone. Simply put, increasing worry about a military conflict between Israel and Iran has created a “fear premium”.

The last three global recessions (prior to 2008) were each caused by a geopolitical shock in the Middle East that led to a sharp spike in oil prices. The 1973 Yom Kippur War between Israel and the Arab states led to global stagflation (recession and inflation) in 1974-1975. The Iranian revolution in 1979 led to global stagflation in 1980-1982. And Iraq’s invasion of Kuwait in the summer of 1990 led to the global recession of 1990-1991.

Even the recent global recession, though triggered by a financial crisis, was exacerbated by spiking oil prices in 2008. With the barrel price reaching $145 in July of that year, oil-importing advanced economies and emerging markets alike faced a recessionary tipping point.

The risk that Israel’s threat to attack Iran’s nuclear installations will, in fact, lead to an outright military conflict may still be low, but it is growing. Israeli Prime Minister Binyamin Netanyahu’s recent visit to the U.S. demonstrated that Israel’s fuse is much shorter than the Americans’. The current war of words is escalating, as is the covert war that Israel and the U.S. are allegedly engaging in with Iran (including killings of nuclear scientists and use of cyber-warfare to damage nuclear facilities).

from MacroScope:

Baltic shipping index getting drier

An obscure gauge of shipping costs rose to prominence in geeky macro circles during the financial crisis because its plunge provided a telling lead on the economic crash that unfolded in 2008 and 2009. Now, the Baltic Dry Index has again taken a nosedive, falling to its lowest level in more than two decades.

This time, analysts are explaining it away as a reflection of an increased number of carriers at sea.

Julian Jessop at Capital Economics, acknowledges this has indeed been a big factor behind the index’s decline. Still, he suggests the magnitude of the drop should give forecasters some pause.

We think it would be wrong to dismiss entirely the warning signals that the sinking of the Baltic index is sending about the underlying demand for commodities and the health of the world economy more generally. If the BDI fails to rebound soon, now that the peak of the holiday season has passed, it may well be telling us something important about the health of the global economy after all.

from Global Investing:

January in the rearview mirror

As January 2012 drifts into the rearview mirror as a bumper month for world markets, one way to capture the year so far is in pictures - thanks to Scott Barber and our graphics team.

The driving force behind the market surge was clearly the latest liquidity/monetary stimuli from the world's central banks.

The ECB's near half trillion euros of 3-year loans  has stabilised Europe's ailing banks by flooding them with cheap cash for much lower quality collateral. In the process, it's also opened up critical funding windows for the banks and allowed some reinvestment of the ECB loans into cash-strapped euro zone goverments. That in turn has seen most euro government borrowing rates fall. It's also allowed other corporates to come to the capital markets and JP Morgan estimates that euro zone corporate bond sales in January totalled 46 billion euros, the same last year and split equally between financials and non-financials..

But to the extent that the ECB move was aimed primarily at preventing a seizure of the banks, then one measure of  success can be seen in the degree to which it steepened government yield curves in Spain and Italy. A positive yield curve, which measures the gap between short-term  and long-term interest rates,  is effectively commercial banks' ATM -- they  make money by simply borrowing short-term and lending long. This chart then shows some normality returning to the benchmark interest structure.

from Breakingviews:

A Van Winkle return to Davos and to real problems

By Rob Cox The author is a Reuters Breakingviews columnist. The opinions expressed are his own.It was well past midnight in late January 2000 when an investment banking contact called my Davos hotel room to share the latest details on Vodafone’s hostile bid for Mannesmann. That was news, but the huge hostile takeover was no longer the largest deal in history. It had been displaced a few weeks earlier by the agreed merger of AOL and Time Warner. Such was the talk of the World Economic Forum. The great and the powerful had gathered together to celebrate the success of business and, especially, of finance.

Exuberance over technology and venture capital was almost limitless back in 2000, thanks to the seemingly limitless rise of the tech stocks. Dotcom startups were all the rage. When Japanese Internet mogul Masayoshi Son finished one panel, he was assailed by a gaggle of entrepreneurs waving business plans for him to peruse. In full disclosure, this columnist two weeks later signed up to establish the online financial commentary business that eventually became Reuters Breakingviews.

Coming back to this gathering 12 years later is a Rip Van Winklerian experience. The old world and its little worries look positively quaint. Back then, at what in retrospect proved to be the height of the Great Moderation, business was booming, the Nasdaq still had another 20 percent or so to climb, companies were merging like mad; everything looked rosy. President Bill Clinton parachuted in to give a victory lap. Even the demonstrations that took place against neoliberalism and world trade now look quaint. Defacing a McDonald’s is a far cry from overthrowing governments.

The economic moderation turned out to be built on financial excess. That AOL deal – hailed as visionary by all the delegates of 2000 – has become the poster child for foolish corporate finance. The Nasdaq is a third lower than 12 years ago (before adjusting for inflation). And the banks – what can I say? From triumph to tribulation.

The political world also looks much more treacherous. Geopolitics has not yielded to the irresistible forward march of free market capitalism, and peace no longer looks like something to be taken for granted. The 9/11 attacks spawned wars in Afghanistan and Iraq – the kinds of conflicts that in 2000 were supposed to be a thing of the past.

The World Economic Forum has changed with the times. The rise of the BRICs has brought greater diversity to the audience, which is a good thing. It has also brought many more people – so many, in fact, the organizers have expanded their caste system. There is now a dizzying number of different badges, each offering differing levels of access and status. It’s much easier to be here and still be excluded from the elite – much like the feeling of many of the world’s dispossessed.

The most striking difference, though, is in the increased complexity and severity of the questions confronting the collection of top business people, politicians, investors and academics. Europe’s sovereign debt crisis keeps trundling forward, bringing to the fore thorny challenges to sovereignty, the role of central banks and the solvency of nations. Instead of Clinton smiling from the podium, this year’s keynote address came from the troubled German Chancellor Angela Merkel, the leader with the most cards at the debt crisis table.

from Expert Zone:

Global Economics: When China is not just China

(The views expressed in this column are the author's own and do not represent those of Reuters)

The People's Republic of China's (PRC's) relationship with Iran receives a good deal of attention. As the U.S. considers how to stop Iran's nuclear weapons program short of military action, the PRC is considered vital in ensuring economic sanctions are effective. But it has been difficult to win Chinese cooperation in applying sanctions. One mistake the U.S. may have made is treating China as a unified entity.

It is true, of course, that the PRC has a tightly controlled political system. There is one ruling party, a powerless legislature, and muzzled debate. Even so, distinct interests have emerged.

State-owned enterprises rarely operated internationally a decade ago and, if they did, unfailingly followed the central government line, as when China Unicom was nationalised in 1999. One outcome of state-led development since 2003 is powerful growth by state firms. By some measures, State Grid is the world's biggest power company, China Mobile the biggest telecom, and ICBC the biggest bank.

The PRC's global presence is also much greater. Chinese firms are the world’s biggest exporters. From 2005 to 2011, Chinese outward investment exceeded $300 billion, even excluding bonds.

China's corporate kings are the two largest oil companies, both state-owned: CNPC and Sinopec. Both rank in Fortune’s top 10 globally. They are the two biggest owners of foreign non-bond assets, accounting for more than 25 percent of outward investment -- more than $80 billion -- by themselves. CNPC and Sinopec own stakes in Canadian oil projects; CNPC sends Venezuelan oil to the U.S. for refining; and Sinopec has just made a sizable U.S. shale deal. They also have made large acquisitions in Europe.

Iran has been an important target, with CNPC and Sinopec each having multibillion-dollar projects. However, there are indications that both, along with smaller cousin China National Offshore Oil, have slowed recent work. Why? It probably wasn’t orders from Beijing. Rather, proceeding with their considerable business in Iran in the face of sanctions would put much more of their global business at risk.

from Expert Zone:

Fallout of recession in euro zone

(The views expressed in this column are the author's own and do not represent those of Reuters)

It will not be before February that the euro zone GDP numbers are out. The available information so far indicates the economy is already in recession. This will have serious consequences for all countries, including India.

The data for November is disturbing. Unemployment has hit a new peak of 10.3 pct and is possibly the worst in Spain where it has touched 23 pct. Naturally, consumption expenditure has declined in the euro zone by about 1 pct and will have a depressing effect on GDP growth.

Factory orders are down even in Germany which is the largest euro zone economy. The fall exceeded 4.8 pct although the industry was still flashing positive signals.

Indications are that the euro zone economy is already in recession and growth may have slipped 1.75 pct with some countries diving deeper. The debt crisis and subsequent agreements entered into by EU (excluding the UK), to bring about better fiscal consolidation, have forced a number of countries to cut public spending. While this may reduce fiscal deficit -- the original sin -- it will deepen recession further.

The recession in the euro zone will have adverse consequences for many countries. In India, the impact of the European debt crisis was visible right from the beginning of 2011 though it intensified since August. India was hit most in comparison to other countries. The stock market lost nearly 20 pct in 2011 in the absence of FII investment which also pushed the rupee down from 45 to 53 to the dollar. Simultaneously, there was a fall in direct foreign investment.

The recession in the euro zone will have a crippling effect on our exports which, presently, account for 21 pct of our total exports. Italy and Spain, which are more prone to debt crisis and recession, together share more than 3 pct of our exports. Already, the export growth is down. It was 4 pct in November.

from Amplifications:

Will we ever grow out of growth?

By Kenneth Rogoff

The views expressed are his own.

Modern macroeconomics often seems to treat rapid and stable economic growth as the be-all and end-all of policy. That message is echoed in political debates, central-bank boardrooms, and front-page headlines. But does it really make sense to take growth as the main social objective in perpetuity, as economics textbooks implicitly assume?

Certainly, many critiques of standard economic statistics have argued for broader measures of national welfare, such as life expectancy at birth, literacy, etc. Such appraisals include the United Nations Human Development Report, and, more recently, the French-sponsored Commission on the Measurement of Economic Performance and Social Progress, led by the economists Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi.

But there might be a problem even deeper than statistical narrowness: the failure of modern growth theory to emphasize adequately that people are fundamentally social creatures. They evaluate their welfare based on what they see around them, not just on some absolute standard.

The economist Richard Easterlin famously observed that surveys of “happiness” show surprisingly little evolution in the decades after World War II, despite significant trend income growth. Needless to say, Easterlin’s result seems less plausible for very poor countries, where rapidly rising incomes often allow societies to enjoy large life improvements, which presumably strongly correlate with any reasonable measure of overall well-being.

In advanced economies, however, benchmarking behavior is almost surely an important factor in how people assess their own well-being. If so, generalized income growth might well raise such assessments at a much slower pace than one might expect from looking at how a rise in an individual’s income relative to others affects her welfare. And, on a related note, benchmarking behavior may well imply a different calculus of the tradeoffs between growth and other economic challenges, such as environmental degradation, than conventional growth models suggest.